Introducing Healthcare Reimbursement Accounts
Healthcare Reimbursement Accounts (HRAs) are not new, but rather an improvement on an old idea. HRAs are the best way for a small business to hold the line on healthcare expenses this year in the face of spiraling health insurance costs. Following clarification of rules by the IRS this past summer, these plans are gaining new popularity in the small business market.
HRAs combine high deductible health insurance with a cash reimbursement for employees who incur smaller expenses. For most employees with typical healthcare expenses, this creates a plan that provides 100% coverage at a lower overall cost for the employer. Most plans include some employee co-payments as a cost-savings measure but most employees are unlikely to be affected by these features.
HRAs are not the best choice for very small 1-3 person or husband-and-wife businesses. (In these very small businesses, usually individual limited term insurance or high deductible insurance combined with a Medical Savings Account (MSA) is a better option).
HRAs offer tax savings to the employer and the employee as compared with other health plans that require out-of-pocket payments for deductibles and co-payments. An average employee spends about $1000 per year in out-of-pocket healthcare expenses including, dental, vision, Rx, deductibles and co-payments. The wage taxes on this amount are typically about $400. Since healthcare expenses are not subject to wage taxes, these plans save a total of about $400 for each $1000 of benefit provided through an HRA. This can be enough of a reason to switch to an HRA plan even without the savings on health insurance premiums.
Employers favor HRAs because they are simple and clearly define the employer's cost. Unlike Medical Savings Accounts, the employer has full control of the funds and directly saves money if the employees have few claims. But if the claims are high, the employer's cost is limited to the amount specified in the plan.
Employees like HRA plans because they offer full freedom of choice in choosing medical providers without the need for referrals or network restrictions.
Finally, benefit plan advisers prefer HRA plans because they are more flexible and less expensive to administer than other types of health plans. Also, these plans are available in all 50 states regardless of the type of health insurance plan used (or even when no group health insurance is used).
HRAs can be combined with other employee benefits within a Cafeteria-style Flexible Benefit Plan and a 401(k) plan.
Freedom Benefits charges $150 to set up a HRA plan either as a stand-alone benefit or as part of a comprehensive flexible benefit plan. The plans can be self-administered or administered by Freedom Benefits. The maximum total administrative charge is $150 per employee per year. This cost is usually more than offset by savings in wage taxes, so there is usually no net cost to most small businesses to convert to this type of benefit plan.
Since most small business health plans operate on a calendar year basis (for tracking deductibles, co-payments and salary deductions), the best time to set up an HRA plan is now for an effective date of January 1.
* HRAs are known as healthcare reimbursements arrangements� by the IRS and often as medical expense reimbursement plans� within flexible benefit plans. In the future the term HRA� will be commonly used to incorporate all of these benefit plans.